Insolvency risk refers to the possibility that an insurance company is unable to meet its financial obligations. This possibility emphasizes the importance of insurer ratings and choosing a financially strong, highly rated insurance company.
Insurance can be broken down into two groups, indemnity and non-indemnity. For example, property insurance is indemnity insurance while life insurance is non-indemnity insurance.
Indemnity means that the insured is entitled to a specific amount of compensation for a loss that is tied to a replacement, reimbursement, or fair-market value. The primary difference is that with indemnity insurance, there is no “profit” so to speak.
Non-indemnity insurance tends to cover things with no real replacement value. The amount of compensation received cannot be directly correlated with the loss. For example, life insurance is non-indemnity insurance because you cannot place a value or a cost of replacement on a person’s life.
Risk is uncertainty. Risk is the variability around an expected outcome. The larger the variability, the higher the uncertainty, the larger the risk. Risk is pervasive. Most activities involve some sort of risk. Our goal is the minimize the cost of risk.
Insurance can be divided into two groups, indemnity and non-indemnity. Learn the difference between these two groups of insurance.
Insolvency risk refers to the possibility that an insurance company is unable to meet its financial obligations.
Both types of insurance policies, term and cash value, can act as either participating or non-participating (par or non-par, respectively). Most policies are par policies.
We’ve mentioned that we cannot place a value on human life. It is important to understand that though we cannot readily assess the value of a human life, we do put a price on it in different ways, some more direct than others.
Insurance is a broad and complex topic, but in essence a simple concept. Insurance is about the management of risk. When buying insurance, we’re paying to convert an uncertainty into a certainty. The goal of insurance is to minimize the cost of risk. [Read more…] about Introduction to Insurance